Japan’s LDP, ally agree on 2% inflation

MONETARY EASING:：The agreement with the New Komeito also calls for expanding this year’s budget and deregulating the energy, environment and healthcare sectors

Wed, Dec 26, 2012 - Page 15

Bloomberg

Shinzo Abe, who is likely to be elected Japan’s prime minister tomorrow, agreed with his coalition ally Natsuo Yamaguchi of the New Komeito Party on a policy package that includes “bold monetary easing” to reach an inflation target of 2 percent.

While Abe’s Liberal Democratic Party (LDP) won a landslide victory in this month’s election, it lacks a majority in parliament’s upper house. Backing from New Komeito on specific proposals increases the chance that they will become law.

New Komeito had warned during the election campaign that forcing the Bank of Japan to reach a 2 percent inflation target risked undermining its independence. Abe had also pledged to raise defense spending, while Yamaguchi said in an interview on Dec. 6 that any drastic rise was “undesirable.”

The agreement with New Komeito also calls for a “large” extra budget for the current fiscal year ending in March and deregulation of the energy, environment and healthcare sectors. The parties agreed to seek nominal GDP growth of 3 percent, without giving a timeframe for the goal.

The yen rallied from a 20-month low against the US dollar on speculation that monetary-easing bets had driven the Japanese currency down too rapidly.

The yen earlier weakened to the brink of ￥85 per US dollar after Abe said he may change the law governing the central bank unless it boosts its inflation target. Demand for the US dollar was supported as investors sought the safety of the world’s reserve currency amid concern that US lawmakers will fail to avoid the so-called “fiscal cliff.”

“Dollar-yen rose to try 85 on the back of Abe’s comments, but it was sold off in front of key resistance levels,” said Michiyoshi Kato, senior vice president of foreign-currency sales at Mizuho Corporate Bank in Tokyo. “The yen moves are probably caused by limited liquidity in the market.”

The Japanese currency touched ￥84.96 per US dollar, the weakest since April 11 last year, before trading at ￥84.85 at 4:17pm in Tokyo, 0.1 percent stronger than the New York close. It gained 0.1 percent to ￥111.86 per euro, following a 0.8 percent slide on Monday. The US dollar was little changed at US$1.3183.

Japan’s consumer prices excluding fresh food is estimated to drop 0.1 percent in November from a year earlier, according to the median estimate of economists in a Bloomberg News survey before the data release on Friday.

Core inflation has fallen an average of 0.2 percent every month in the past decade.

“Japan’s Abe means business this time,” Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co, said in a Twitter post. “Trillions of yen to be printed. Weak yen, positive inflation.”

The yen has tumbled 13 percent this year, including a 3.6 percent drop in the past month, making it the worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The US dollar has weakened 2.7 percent this year and the euro has dropped 0.9 percent.